Colorado’s “Amazon” law requiring out-of-state retailers to report sales held to be unconstitutional

The U.S. District Court for the District of Colorado has held that
the Colorado law requiring out-of state retailers to report
information about customers’ purchases to each customer and to the
Colorado Department of Revenue (DOR) violated the Commerce Clause of
the United States Constitution (Direct
Marketing Ass’n v. Huber, No. 1:10-CV-01546-REB-CBS (D.
Colo. 3/30/12)).

The Colorado law (Colo. Rev. Stat. §39-21-112(3.5)) and related
regulations would require any retailer who sells $100,000 or more of
products to customers in Colorado, but does not collect and remit
sales taxes on those products, to:

Notify the purchaser that the retailer does not collect
Colorado sales tax and that the purchaser is therefore obligated to
self-report and pay use tax.

Provide each customer who purchases more than $500/year from the
retailer with an annual report of the prior calendar year’s
purchases and inform the customer that the retailer is required to
file an annual purchase summary reporting the customer’s name and
total purchases to the Colorado DOR.

Provide the DOR with an annual customer information report stating
the name, billing and shipping address, and total purchases for each
of its Colorado customers.

The Direct Marketing Association (DMA), the plaintiff in the
case, is an association of direct marketers that sell products through
catalogs, magazine and newspaper advertisements, broadcast media, and
the internet. The DMA had earlier in the litigation persuaded the same
court to issue an injunction
to prevent the law from being enforced.

The court found that the law violated the “dormant Commerce Clause”
(the constitutional theory that prohibits state actions that interfere
with interstate commerce) because it discriminated against
out-of-state retailers by treating them differently from in-state
retailers and was therefore invalid on its face. The court further
held that the DOR had failed to overcome this finding of facial
invalidity because it failed to prove that the law advanced a
legitimate local purpose that could not be served by “reasonable
nondiscriminatory alternatives.”

On this point, the DMA argued that there were a number of
nondiscriminatory ways of achieving the same ends, such as having a
line on the state resident income tax return to report use tax. The
DOR, apparently believing it would prevail on this issue, did not
offer much in the way of possible alternative methods. Thus, the court
held that the law violated that Commerce Clause

The court further held that the law violated the Commerce Clause by
placing impermissible undue burdens on interstate commerce. This
analysis relied greatly on the Supreme Court’s decision in Quill
Corp. v. North Dakota, 504 U.S. 298 (1992), which held that
vendors whose only connection with the taxing state is by common
carrier or U.S. mail could not be required to collect sales and use
taxes. The court noted that the Colorado law differed from that in
Quill because the Colorado law did not require the retailers to
collect and remit sales and use tax, but that it nonetheless imposed
the same undue burdens on out-of-state retailers “condemned in
Quill.”

In the final part of the opinion, the court issued a permanent
injunction to prevent the law from being enforced, finding that the
DMA proved (1) success on the merits, (2) irreparable harm if the
injunction is not issued, (3) the threatened injury outweighs the harm
the injunction may cause the state of Colorado, and (4) the injunction
will not adversely affect the public interest.

The ruling could represent a defeat for the Multistate Tax
Commission, which has proposed a model statute that is similar to
Colorado’s for its member states to adopt. The AICPA testified
against the model statute last year for several reasons:

It could undermine collaborative work underway (the
Streamlined Sales and Use Tax Project, a multistate effort to
simplify and modernize sales and use tax administration).

Out-of-state businesses that are not required to collect and remit
sales tax should not be required to police individual use tax
noncompliance.

The costs of compliance with the statute could far outweigh the
benefits received by the states.

Jamie Yesnowitz, vice chair of the AICPA’s State and Local
Taxation Technical Resource Panel, told the Commission, “It is not
clear how receipt of information on thousands of internet purchases
will translate into revenue for the states,” noting states may not
have the resources to receive and properly analyze such an enormous
quantity of reports.